FINRA's Rick Ketchum: Think Like Billy Beane and Unleash the Power of Data; A New Era of Regulation (with Lofchie Comment)
In a speech at the SIFMA CL New York Regional Seminar, FINRA Chairman and CEO Rick Ketchum discussed how technological advances in the areas of data, risk analytics and surveillance are changing the way FINRA approaches market regulation. Chairman Ketchum envisions a "new day in regulation" that will harness the power of big data and technology to protect investors.
In his remarks, Chairman Ketchum stated that, while FINRA is at the very early stages of a new era of big data and cloud computing, there is transformative potential for regulation. Observing that FINRA already collects vast amounts of data from firms and the markets, Chairman Ketchum declared that determining how best to apply FINRA resources and improve the effectiveness and efficiency of its regulatory programs is the "next logical step" in the evolution of FINRA's regulatory program. He characterized this evolution in the following way: "to use emerging technologies to better analyze the data we're already gathering, and to gather more - and different - data to identify and prioritize risk in order to better protect investors and monitor the markets."
While recognizing that there are buy-side privacy concerns in these big data repositories, Chairman Ketchum suggested that the true transformation for FINRA will be the indexing of all of the data which FINRA collects from firms and exchanges into a single search or surveillance query, and the similar steps FINRA is taking to change the way FINRA collects and looks at market information.
Chairman Ketchum went on to discuss the compliance challenges facing firms today. Citing FINRA's recent conflicts report, Chairman Ketchum identified the progress that many firms have made as the reason the bar must continue to be raised. He noted that many firms are at the forefront of financial innovation and in "the best position to identify the conflicts of interest that may exist when a product or service is launched or that develop over time."
The Chairman concluded by outlining a few of the effective practices which firms can adopt, including, among other practices, the following:
- Firms can establish new product review processes that include perspectives independent of the business unit proposing a product.
- Firms should disclose conflicts with the objective of helping to ensure that customers understand the conflicts that the firm or registered representative have in recommending the product.
- Firms should review products after they're launched to identify potential problems with a product that may not have been readily apparent during the initial review - or that may have arisen as a result of economic events - and take remedial action.
- Firms' private wealth businesses should operate with appropriate independence from other business lines within a firm.
- Firms with revenue sharing or other partnering arrangements with third parties should exercise the necessary diligence and independent judgment to protect their customers' interests.
- Each firm should ensure that its compliance department plays a significant role as a partner with the business to understand where the interests of clients and those of the firm do not align and what exposures lie in that gap.
Lofchie Comment: A fundamental problem right now is that firms are simply overwhelmed with new Dodd-Frank regulations, many of which are largely useless (tell me how clearing interest rate swaps makes the economy safe), and some of which are affirmatively destructive (mandatory SEF trading), but all of which are expensive. The fragmentation of power between the various regulators, with each of them seemingly competing to add new rules, is simply overwhelming the ability of the regulated to keep up.Some of the most challenging regulations are on the data collection side, with various regulators mandating the collection of information without any ability to use it (Query: how can the CFTC use historical swaps data or how can the SEC make sense of the leverage information in Form PF).
See: Transcript of Rick Ketchum's Speech.